skip to Main Content
The smarter way
to do assignments.

Please note that this is just a preview of a school assignment posted on our website by one of our clients. If you need assistance with this question too, please click on the Order button at the bottom of the page to get started.

A model was proposed for a country’s sovereign debt as follows:   The economy is in one of three states: 1 (good), 2 (bad) and 3 (default).  Transition intensities λi,j are constant and as follows:    λ1,2 = 1; λ1,3 = 0; λ2,1 = 0.25, λ2,3 = 0.75; λ3j = 0 for all j and λ1,1 = λ2,2 = −1.   It follows that if pi(t) is the probability that the economy is in state i at time t then:     )(25.0)()(211tptpdttdp+−=   and     )()()(212tptpdttdp−=.   Set h(t) = 2p1 (t) − p2(t).    (ii) (a) Show that ()1.5().dhthtdt=−    (b)  Derive a similar equation for k defined by k(t) = 2p1(t) + p2(t).     [2]   Suppose that this country’s economy is in state 2 at time 0.    (iii)       Find the probability that it is in default at time 2. [4]  Assume a continuously compounded risk-free interest rate of 2% per annum and  a recovery rate of 60%.   (iv)   (a)  Deduce the price under this model for a zero-coupon bond in this country with a redemption value of 100 and a redemption date in two years’ time.     (b)  Calculate the credit spread.     [3]     [Total 

GET HELP WITH THIS ASSIGNMENT TODAY

Clicking on this button will take you to our custom assignment page. Here you can fill out all the additional details for this particular paper (grading rubric, academic style, number of sources etc), after which your paper will get assigned to a course-specific writer. If you have any issues/concerns, please don’t hesitate to contact our live support team or email us right away.

How It Works        |        About Us       |       Contact Us

© 2018 | Intelli Essays Homework Service®